Changing the Perception of the Biotech One-Trick Pony

 |  Includes: ALXN, DNDN, EXEL, IMCL, ONXX
by: Chimera Research Group

The In Vivo Blog had a very nice piece on the recent turnaround in Exelixis’ (NASDAQ:EXEL) strategy - downsizing its broad portfolio to focus on its most advanced compound, XL184. This announcement came after promising results were reported for the compound in castration-resistant prostate cancer patients. Also being downsized is the company; following on the heels of a recent restructuring and change in CEO, Exelixis will cut its workforce by an additional 65% over the next two years, ending with around 140 employees. To paraphrase In Vivo, “as much as we like to talk about multiple shots on goal, many biotechs are ultimately forced to double-down on their best shot at success.”

Perhaps it is time we change our perception of the one-trick-pony. Biotechs with rich pipelines have historically been seen as lower risk investments due to the inherently high failure rate in drug development. Yet some of the most successful new crop of small drug developers began by focusing on a single drug. For example, Onyx (NASDAQ:ONXX) has Nexavar, Dendreon (NASDAQ:DNDN) has Provenge, Alexion (NASDAQ:ALXN) has Soliris, and Imclone (IMCL) has Erbitux.

There are multiple benefits in devoting all of a company’s resources to a single project despite the concentrated risk. The project will receive management’s complete and undivided attention. Every lab assay, preclinical study, clinical site authorization will come under scrutiny. After all, success is paramount.

A high level of focus also forces companies to prioritize their drug candidates early in the development process. Only the best molecules with the highest chance of success go forward. This will increase management’s confidence in their candidate and conserve limited financial resources. Both will be necessary for the long approval process, especially considering the FDA’s extremely conservative stance of late.

A lower burn rate combined with higher quality candidates give drug developers a significantly better chance of success relative to dollars spent. Even biotechs considered to have deep pipelines are focused on just a couple of top priorities. This is a result of the new pragmatism in an economic environment of tight funding.

As witnessed with many biotechs, the launch of a single commercially successful product is a transformational event. With this, a one-product company can use its cash flows to build up a bona fide pipeline. Early stage projects once on hold can now be set free; acquisitions can give companies an instant pipeline boost. This is exactly what Onyx has done, combining internal research with licensing and acquisitions. Success with Soliris has given Alexion ample resources to develop its antibody for lymphoma.

In summary, rich pipelines may not be such a good predictor of success in biotech drug development. Sum-of-the-parts valuation may need to be re-evaluated.

Disclosure: I am Long ALXN.